The Euro cardinals

Derk Jan Eppink // Thu, 16. Aug 2012

To the euro system central bankers are what cardinals are for the Vatican: indispensible for the system. They talk in mysterious and coded language. Reports of the Governing Council of the European Central Bank (ECB) are not published, unlike reports of the American Fed and the Bank of Japan. To grasp the policies and motives of the ECB one has to resort to the skills of Vatican Watchers or retired Kremlinologists. Conflicts between cardinals are fought with venom and intrigue, as between central bankers.

There is a cold war raging between the German central bank, the Bundesbank, and the ECB. The core of the conflict is the euro crisis in which, according to the Bundesbank, the ECB is operating outside its legal mandate: price stability. Instead, the ECB gets increasingly involved in operations to save the euro. On July 26, Mario Draghi, President of the ECB, said in London that he will do 'whatever it takes' to save the euro. At the Bundesbank in Frankfurt all alarm bells went off. Jens Weidmann, President of the German central bank, gave a shot across the bow on the website of his bank: 'We are not just one of the 17 central banks. We are the biggest and most important.'

Whatever it takes requires, according to Draghi, massive ECB intervention on the state bond market. In the past the ECB purchased state bonds on the primary market, directly from countries like Greece, Italy and Spain to keep their borrowing costs down. That policy met the wrath of the Bundesbank. This time around, under fierce German pressure, Draghi had to backtrack. On August 2, following the Governing Council of the ECB, Draghi announced that the ECB will intervene on the secondary market of state bonds, only after a member state in trouble has invoked the support of one of the EU rescue funds: the European Financial Stability Mechanism (EFSF) or the European Stability Mechanism (ESM).

One central bank voted against: the Bundesbank. Draghi can rely on a large majority of the 23 members Governing Council, but resistance of the Bundesbank undermines his political legitimacy. In spite of the fact that Chancellor Merkel and minister of Finance, Schäuble, openly backed Draghi, German public opinion have most confidence in two constitutional bodies: the Bundesbank and the Constitutional Court which on September 12 will publish a decision on the legal question whether the ESM is in line with the German constitution.

In the dual fight Draghi tries to isolate the Bundesbank. Generally, Weidmann gets the support of Klaas Knot, President of the Dutch central bank. Last year, when the ECB decided to grant the banking sector massive liquidity support of around 1 trillion euro, the Bundesbank and the Dutch central bank held together. They supported the measure, but criticized the weakening of collateral which the ECB demanded for its loans.

On August 2, Knot did not follow Weidmann. Unwise, because where is the limit of 'whatever it takes'? The ESM lacks sufficient capital to save Italy and Spain. If these countries would submit a request for help at the EFSF or the ESM Draghi can intervene in, as he said, 'a size needed to reach the goal'. The ECB will become an ATM releasing money without limits.

The Bundesbank stood alone. The Netherland were the only country that could afford to show more courage. Estonia is just in the euro zone whereas Luxembourg headed by Prime Minister Jean Claude Juncker, equally president of the euro group, chairs the curie of cardinals. Finland? Erkki Liikanen, President of the Finnish central bank and former European Commissioner, lacks courage. Remains Knot. But Draghi succeeded in turning him around. Politically that is bad, because Germans can not cope with political isolation in Europe. Once isolated, they tend to give in. And that is precisely what Draghi is aiming at.

Under the guidance of Draghi, the ECB gets increasingly involved in a political role without any need to be answerable to anyone. For example, the Governing Board of the ECB also decided to steer Greece through the summer by increasing the ceiling of a bond buying scheme (from 3 to 7 billion euro) allowing Greek banks to buy Greek state bonds to keep the state operating. Collateral issued by the Greek state has no value. If Greek banks threaten to default as result of the deal, the ECB will resort to automatic emergency support. The story was reported in Die Welt, not in any report of the ECB protected by secrecy rules.

At the same moment Italian Prime Minister, Mario Monti, himself never elected, gave an interview to Der Spiegel. He proposed to limit the power of national parliaments in EU policies. According to him parliaments are too much of a nuisance factor for national governments trying to agree in Brussels. Monti: 'Every government has the duty to educate its parliament'. So, the Dutch parliament should be sent into a collective re-education camp. The Frankfurter Allgemeine Zeitung wrote: 'What is the conclusion? Europe only remains if national parliaments have little or nothing to say'?

Once, the euro was the means to reach the goal of proper European integration. But now the means, the euro, has become an end in itself. Everything is being pushed aside, including parliamentary control. Under guidance of unelected top bureaucrats and euro cardinals Europe is on the track of abolishing democracies to save the euro. 'Whatever it takes'.

Derk Jan Eppink

Political Analyst

Derk Jan Eppink (1958) is former of the European Parliament and was vice president of the European Conservatives and Reformists (ECR). He worked as member of cabinet in the European Commission.

As a journalist he worked with NRC Handelsblad and De Standaard. At the moment he is senior fellow with the London Policy Center (LPC), a New York based think tank and he is foreign affairs columnist for the Dutch newspaper De Volkskrant.